How to Perform a Deal Analysis

The Logistics of Leasing

Everybody has their own opinion on what a good deal means to them. They then go about using that lens to select and negotiate accordingly. Most people, however, don’t analyze their proposals or compare them in great detail.

Deal analysis is pretty straight forward on the landlord side of the table as landlords have made a capital investment in the acquisition of the property, and they are looking for a return on their investment. As time goes by, they have to continue to reinvest within the property and look for a return on their continued investment. Ultimately there is a time where they will sell the asset, and they will want to make sure they have leased it, and maintained it, in a way that maximizes the value of the sale and overall yield. Karen Davidson helped refine my property underwriting analysis skills in her Argus Discounted Cash Flow analysis program at UCLA. When you can model each lease, you can understand how the value of the lease you are proposing to the landlord effects the value of their property.

Companies that lease warehouses are not in the real estate business. Real estate may be a mandatory component of your business, but it is not your actual business. You may make steel brackets for home buildings, run a laboratory testing cancer drugs, deliver shoes for Walmart, or distribute radiators to automotive manufactures. You use real estate to serve your customers, grow your business, and house your team. Because of this, we can’t make a simple return on investment calculations to drive business decisions. What we can focus on is the impact that a piece of real estate has on your ability to operate profitably and grow the business.

Today, we’ll look at how real estate impacts the operations and finance of the company over time. We are going to start with the most common situation wherein your company has to move to a new building, and we are trying to decide which building to choose.

Compare Multiple Alternative Locations

Each time that we complete a round of negotiations on multiple buildings, we analyze the proposals by comparing them side by side. This analysis allows us to have internal discussions with our clients and make value judgments based on real-time data. These value judgments will enable us to prioritize our property pursuits and understand how we can leverage our next round of negotiations.

The level of nuance and technical language can be overwhelming for some here. I’ll do my best to provide you with a baseline from which you can add or subtract. Some companies do very little in lease analysis. In contrast, others have a series of complicated internal calculations based upon FASB guidelines, costs of capital, internal rates of return, and disclosure requirements. The idea here is that you are aware of what is possible and how you can use financial analysis to improve decision making.

The key inputs for each proposal that we are analyzing on an industrial lease transaction are:

  • Square footage
  • Start date
  • Term
  • Starting rent
  • Annual escalations
  • Free rent
  • Type of lease
  • Base year
  • Operating expenses
  • Tenant improvement cost
  • Tenant improvement allowance
  • Net tenant improvement expense
  • Tenant improvement amortization

The outputs that are generated and compared on these very same lease proposals are:

  • Year 1 annual cash flow
  • Year 1 monthly cash flow
  • Total value of concessions
  • Net effective rent PSF (this is the average rent PSF after subtracting leasing concessions)
  • Average cash flow per year
  • Total consideration of lease obligations

If all you did was compare and contrast each of these inputs and outputs side by side within a spreadsheet, you would be ahead of most people who operate based on gut feel. If you want to go deeper into your analysis you can think about how to wield this data to size up opportunities and value different aspects of the building.

Use Deal Analysis to Make Decisions

Sensitivity analysis

Some executives like to compare different proposals by comparing what happens if you make slight adjustments. For example, is it better to ask for a discount to the rental rate or to reduce the annual lease rate increases? You’ll only know by looking at each set of lease variables and seeing how they impact the overall monthly, annual, first year, or total consideration of the deal being discussed.

Operational insights

Since no two industrial buildings will be the exact same it is helpful to compare how your P&L statement will be impacted by each building. Perhaps you will have can hold more inventory in one of the warehouses, or you can ship faster with the greater amount of loading docks in another, or you can package goods faster in a third. It is helpful to create a category for each part of your business if you think it will be impacted significantly by one building over another. In doing this, you can then make value judgements and incorporate those value judgements into what the property is worth to you. This shifts the tone of the conversation with the landlord from negotiating a “market” deal to negotiating based on the property’s value to you.


Time can be factored in many different ways. It is helpful to thing about comparing different term lengths, construction timelines, lease commencement dates and expiration dates.

  • Term length – Are each of the lease terms you are considering the same amount of time? Sometimes concessions will lead to adding term onto the leases. Does that work better or worse for you? How does that change your comparison of two leases choices?
  • Construction time – When are each building deliverable based on completion of tenant improvements? How confident are you in each landlord’s ability to perform on time?
  • Lease commencement time – When is the ideal month to start your lease? You might find two buildings that fit your company, but one landlord will only push your start date out 30 days due to competing offers whereas the other landlord can wait 90 days for you because of an existing tenant. How flexible is each landlord and how flexible to you need them to be?
  • Expiration Date – You may not want to end your lease during your busy season? Can you landlord accommodate an irregular lease term length so that your lease can expire at the optimal time?

Total Cost to Occupy

When it comes to the total cost to occupy the property, here we go back to the three components of budgeting, 1) the cost to build out the new building, 2) the expense of the actual move into the new building, and 3) the cost to surrender and decommission the old building. What is the total cost to occupy each building in relation to each other? How does that effect the properties attractiveness to you?

Evaluate Your Lease Renewal

Nobody moves from one industrial building to another of the same size. It just doesn’t happen. The cost to build out a new space and relocate is always higher than the cost of staying, even if the lease rate on the existing space is higher than the other. Obviously, if we are talking about moving out of state where there are other considerations, it might be possible. Moving within the same geographic area purely to get a better rent structure for the same size building. It literally almost never happens.

It is valuable to compare renewing your lease versus relocating, because it is an opportunity to reframe your conversation with your landlord. When you can tell your landlord that you cannot renew with them because the value to you is only X, they are asking Y, and you know that because you have studied the opportunity to relocate to a different building, you have changed the nature of the negotiation. The standard way of negotiating is to ask yourself, “am I getting a good deal compared with all of the other deals taking place in the market?” With this approach, you have shifted it to, what is this particular deal worth to me? When the landlord understands this, it will usually prompt them to become more creative in their deal making so that they can better accommodate your unique needs within the context of making a good deal for everybody. There are so many moving pieces in any industrial real estate transaction that there is always room for creative solutions.

The main different between renewing your existing lease and relocating to a new building is that you can forgo the expense of moving to a new building, and the majority of your cash outlays that are related to build out, moving, and the decommission part of the budget. There is one big exception though and that is the cost and disruption of renovating your existing space if you choose to stay.

When companies make decisions for 5-10-year increments, they realize that they will likely need to improve their space every 5-10 years. This can be as little as paint and carpet, usually it is more. Usually there is a reorienting of the office space to modernize the layout, accommodate new furniture, or to make the space more efficient. This means that if you stay, and renew your lease, there is a good chance that you will need to renovate it and figure out a way to do business during the renovation.

When considering renovations on your existing space, you have a couple of key considerations:

  • How long will construction take?
  • How will it impact the use of the space?
  • How will you maintain business operation continuity during construction?
  • Will the landlord contribute to the renovation budget?
  • Will the landlord’s contribution cover the entire expense?
  • Do you have to hire a contractor, or will the landlord hire it for you?
  • What other considerations and improvements do you want to make while you are renovating the building?
  • What new furniture do you need and at what cost?
  • What is the lead time on furniture, and how does that compare with the renovation?
  • What will you do with your old furniture?

We’ve seen all sorts of different ways to make this work for people. Sometimes we will have the landlord’s construction crew work nights and weekends so that we can work during the day and they can renovate during the night. We have seen people move everybody upstairs while the downstairs office is renovated and then move downstairs while the upstairs is renovated. We have also found vacant spaces that the landlord has within their portfolio that we move our office staff to for the time that we are under renovation. None of these options are fun, but if they can help you stay in your current property, save all of the upfront costs of moving, and setup your company to grow for another 5-10 years, they are worth it.

In the last article, we talked about making a note of all of the deferred maintenance on any new building to make sure that the landlord accounts for it separately from your tenant improvement budget. This keen eye for deferred maintenance is even more relevant with lease renewals.

When you lease an industrial building, you are taking on the responsibility to maintain the property as if you own it, as detailed in the lease document section called repairs and replacements. Nine times out of ten times, you are responsible for all repairs. Nine times out of ten times, you will be contributing to the replacement of major building systems like the HVAC units or roof. There is still the odd old-school landlord offering a gross lease where they take care of the roof but this is increasingly becoming rare.

When you renew your lease, though, you are at an inflection point in your relationship with your landlord because you don’t have to extend it. You may have a very valid reason why relocating is a better option for you. But what if the landlord could take care of a few deferred maintenance items for you to help attract you to stay? What would those items be?

You can use all the same deal analysis tool described above in addition to layering on these considerations.